Sunday, June 17, 2012

The Federal Reserve just published a report addressing the loss of income and wealth by Americans in the period between 2007 and 2010. It was quite a blow, as the Washington Post quoted in its story on the Federal Reserve report: “It’s hard to overstate how serious the collapse in the economy was,” said Mark Zandi, chief economist for Moody’s Analytics. “We were in free fall.”

According to the Federal Reserve, median family income in America fell 7.7% in the period from 2007 to 2010. Simultaneously, the median net worth of families fell 38.8%, largely because the collapse of the housing market wiped out most of the net equity folks had built up in their homes, with many now having mortgage balances greater than their house's market value.

During that same period, the compensation of the teachers in our school district looked like this:

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The data for this chart was taken directly from the collective bargaining agreements between the Hilliard Education Association (HEA) and the School Board, which can be found here.

This chart shows the 12 year salary history for three example teachers. One is a New Teacher who was hired in 2002 with a Bachelors degree and no experience, but who goes on to earn BA+150 and Master degrees during this span of time. Next is a teacher who in 2002 has a Masters degree and ten years of experience, and achieves Masters+15 status three years later. The third teacher reaches 30 years of experience by 2013, and has been Masters+15 status the whole time.

If you are not familiar with how the salary grids work, this article may help.

The new, mid-career, and end-of-career teachers would experience annual income growth over these 12 years equivalent to 7.4%, 5.3% and 3.2%, respectively. This reflects the design of the salary schedule, which gives larger percentage increases to the teachers who are just starting out.

Teachers and other public school employees haven't been completely immune to this recession of course. They've lost value in their homes as well. Less tangible to them are the losses they've taken in their retirement fund; I've been reporting about the woes of STRS for a long time now.

But it is fair to say that this new report from the Fed shows that this recession has been much harder in general on folks in the private sector than it has been on the teachers of our district, and most school districts around the country.

This chart depicts shows the inflation-adjusted growth in spending by all State and Local governments (ie - Federal spending is not included here) as compared to the growth in Gross Domestic Product over the past sixty years. It says the State/Local spending (which includes public school districts) has grown at twice the rate of GDP.

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Let's not blame this on the politicians and public sector workers. We elect politicians who promise us things without us caring that they've mortgaged our future to fund those promises, often by creating programs that employ vast armies of public sector workers.

There are many things I admired about Ronald Reagan, but I heard it once said that he invited the whole country to a great steak dinner, then bugged out without picking up the check. I think it might also be fair to say that Bill Clinton gave us a great ride, but it was paid for using frequent flier miles that had been built up during the Reagan years.

Now the frequent flier miles are all used up, and the credit card bill for the steak dinner is still hanging over our heads, not looking like it will ever be paid off. Meanwhile, we've kept putting lots of new stuff on the credit card, and have been getting the credit limit raised all the while to make sure we can charge even more.

It's a scary time.

Our teachers and staff recognized this, and their 2011-2013 collective bargaining agreement dramatically slows the rise in compensation costs compared to prior years. You can see the effect of this agreement in the salary chart above, with 2011-2013 showing essentially flat salaries. As I've said many times, I am appreciative of their understanding in this new reality.

The real question is: Where do we go next?

I'm not trying to ignite a dialog about what teachers are paid. As my friend Marc Schare says, some teachers aren't paid enough, and some are paid too much. Maybe we'll soon have a effectiveness-based reward system which both teachers and the voters will trust, and we can start to deal with this issue. But let's leave that discussion for another time.

The question I'm raising here is about how we're going to survive the next several years. We need to drop the political and emotional rhetoric, and talk about what will work for all the stakeholders in our community.

This may be a particularly tough recession to work our way out of, but I have confidence that we'll slowly get to a better place. On the way there, we'll have lots of gut-wrenching, emotional, and unfortunately hurtful conversations about what is fair, and who should pay for what. These will range from "pay-to-play" decisions at the level of local school districts all the way to figuring out how our nation's Social Security and Medicare/Medicaid systems are going to be kept viable.

We'll hear more of the "tax the rich" and "cut the size of government" rhetoric. We need to do some of both I expect. And we'll need to figure how to keep nudging our economy in hope of getting things going again.

By that, I don't mean we should repeat the ill-conceived first stimulus package that was intended to prime the economic cycle by giving money to the consumers, and expecting them to spend it. Instead, many used it to pay down credit card debt, and if they did spent it, it went toward consumer products typically manufactured overseas. Good for the Chinese, not so much for us. At least the money we borrowed to fund the stimulus came from China as well.

I do think it's appropriate for the government to stimulate the economy, but I think it should done via spending programs that put Americans to work at highly skilled jobs. Reagan used a massive military buildup to accomplish that. Good idea then, maybe not so much now.

Maybe the best place to apply leverage is with big public works projects, like repair and upgrade of our infrastructure. No, we don't need high speed rail. Other than the densely populated Northeast Corridor, which is already well served by passenger rail service, airplanes are a better form of public conveyance for America. That's the reason the passenger railroads disappeared in the first place.

But we do need lots of highways and bridges repaired. Our national power grid is remarkably efficient and reliable given the technology in place, but we can do lots better. Some major dams need significant repair, while others need to be removed. These are all jobs that pay well, and can't be sourced overseas. The people in those jobs will spend their income here, supporting local economies. If we're smart about our other national priorities, we can set our economy back on a growth path in a year or two.

In the meantime, we need to protect our local economy and our property values by keeping the desirablility of our school district high. That means that we need to continue to bear down and be more cost efficient in our operations, and maybe even decide to curtail or eliminate some course offerings, programs and services. We voters may have to pass a levy every once in a while to offset what I believe will be a continuing State policy to reduce funding to school districts perceived to be affluent, such as ours.

And if we ever want to give raises to our teachers and staff again, we'll likely need some new levy money to fund that as well.

Teachers and staff - our community respects you and appreciates the way you care about our kids. But we need you to continue to be cognizant as to how scary this economy is for folks who don't have the same degree of job security as you. It will get better, we just don't know when.

We'll be negotiating new labor agreements in about a year. I hope we'll all go into that conversation with tons of empathy and information, and a shared goal to protect our community.

20 comments:

"Teachers and staff - our community respects you and appreciates the way you care about our kids. But we need you to continue to be cognizant as to how scary this economy is for folks who don't have the same degree of job security as you. It will get better, we just don't know when."

Well stated. I know my temptation seeing 3-7% raises is to lash out. I've had 0% raises from 2007 to date and rarely over 3% in the 5 years prior. They ought to get a dose of what I've seen, is my gut reaction.

But behind the stats are teachers, and those I've encountered in Hilliard, with few exceptions, have been reasonable, caring and hard working. They do a job i would be unwilling to do.

So yes, a bit of a day of reckoning is at hand, but a "stick it to 'em" mentality is only going to prevent progress.

Hopefully the staff can see how protected they've been through the rough time and how they have yet to really deal with it. They get to have a bit of a soft landing, but land they still must.

I understand what you're saying. My retirement planning assumed that we could easily make 5% annual return with a 'safe' portfolio of CD, Treasuries and municipal bonds. Who would have thought we would have a zero percent interest environment? Great for borrowers - a nightmare for savers.

Folks are hurting in many ways, and in most cases, due to no fault of their own. That's the reason I used the title "Recalibration" for this article - we need to be a lot less concerned with "what was" and deal with "what is."

Paul, is there also a way to determine the additional benefits (insurance and related but not retirement) to compare what has happened to the private sector residents? In the past the board and teachers union negotiated a contract where they pay a bit more towards a deductible but I wonder how that compares to the reality of our family's $4,000+ deductible before insurance covers anything beyond a pediatric well visit and an annual GYN visit (just love the new face of insurance!).

Again, not slamming the teachers but I wonder if that difference even further widens the gap or if the slide is about the same for public and private sector folks? Maybe the increased insurance/medical costs are included in the drop of income for the private sector?

I don't think such comparisons are particularly fruitful in the dialog we need to have. These benefits are part of the total cost of personnel, and need to be considered in conjunction with salary, deferred comp (e.g. sick days), retirement contributions, etc when negotiating with the unions.

But it's worth noting that even with the teachers freezing their base pay for four years, and delaying step increases, the Five Year Forecast projects that our health coverage will increase at a rate of 8% per year. This pushes up overall comp+benefits costs at a rate of about 3%/year.

By FY16, benefits spending is projected to be $9m/year more than they were in FY11, the equivalent of 3.8 mills of additional property taxes ($116/yr per $100,000 of market value).

I should also remind folks that in their latest contract, the teachers agreed to step up their share of the health insurance premium from 10% to 15%. As recently as 2007, health insurance coverage was free.

We are self-insured on our health benefits, so our cost is the actual cost of claims, plus a fee to Aetna as our Third Party Administrator (TPA). For calendar 2011, our claims plus TPA fee was $19.4 million. They're going to be a little higher this year and next because it appears the retiring teachers are getting some medical issues taken care of (e.g. joint replacements) before transitioning off our coverage to the STRS plan.

The employee funding rates are $473.74/mo for single coverage and $1,279/mo. At a 10% share, the employee deduction would have $47.37/mo and $127.90/mo. Going to a 15% share raises the employee deduction to $71.06/mo and $191.86/mo. With the 12% projected bump in premium costs next year, it will likely go to $79.59/mo and $214.89/mo.

So in the period between 2007 and the employee share of health coverage costs has risen from zero to around $2,400/yr.

Note that no teacher has seen her/his pay go down since 2007 because of this - it was more than offset by salary increases in the past 5 years regardless of where a teacher sits on the pay scale (ie - every teacher's annual income in 2012 is at least $2,400 more than it was in 2007).

Paul, the solution to our financial down the road issue rest with the pension issue, lets reduce our obligationsfor a projected 5 million dollar saving plus by increasing the contribution rate at least to 20% AND then higher.The medical contribution despite pleadings to the contrary should be also be increased significantly. Sick time adjustments as well, and a hard look why we need 18 weight room personnel during the summer as an example and whyone high school had 9 paid coaches and 4 so called volunteer assistants. By the way these were not posted

If we are only asking 129.oo per month for family coverage many in the 3 to 5 thousand range would like to know why their coverage is 300 plus per month.

Have you even done an analysis on the actual value of the teachers' pension at a 14% contribution rate? Its rather sad, quite honestly... 20% contribution rates would put the value to young teachers at a point where the state and district could contribute about 3% of salary (ie, less than 1/3 the average private sector contribution rate between social security and 401(k) matches combined) and long term bonds would provide sufficient revenue to fully fund their pension. That's not a fair deal in the least.

As for health care costs, I agree family coverage should probably be higher contributions.... But let's not forget to look at actual cost of the plan. Is your $300 premium payment for a plan that costs $1600/mo, in which case the employer is picking up $1300/mo, while the teacher plan is $129 for a plan that costs $1300/mo, meaning the district is picking up $1171/mo? If something like that is the case, then your employer is actually being more generous than the district, despite the higher premium for you.

That's missed on a LOT of people - healthcare plans vary wildly from one to another based on what they cover, so the employee share of the premium (in $ or %) isn't really relevant - its what the employer pays in $ that really matters. For example, my wife's school district health plan (not Hilliard) costs about $4000 per year for single coverage. Many people complain that the employee only pays $50 per month, or 15% of the premium, while they pay much more for single coverage... all the while ignoring the fact that their health plan in the private sector is actually a much more generous plan.

It's very challenging to compare one organization's health coverage to another's; about as challenging as comparing teacher salary tables.

One must look at deductibles, co-pays, lifetime coverage limits and all that. I've certainly not tried to do that, not have I seen such a comparison.

A challenge in trying to do compensation comparisons is that we keep trying to apply logical analysis to a situation which is really the result of a negotiation. Why do professional athletes get paid more than teachers (or just about anyone else)? It's not because of their intrinsic value to society. It's just because that's what they've been able to negotiate in the economic market in which they participate.

We need to grow up and quit pretending that there's anything more complicated that this going on.

First off, the Fed reported *REAL* (ie, inflation-adjusted income), whereas the teacher income is not adjusted for inflation. To be fair, you should be using real income as well. Applying the BLS's inflation calculator to a Hilliard MA+15 teacher with 10 years of experience in 2007, you'll see that real income grew from 2007-2010, but has shrunk by 5.2% from 2010-2012. So by comparing real income to real income, you see the difference is much smaller than you make it out to be, and may completely evaporate, since, as you have so correctly pointed out in the past, public employee pay tends to be a lagging indicator, in that raises/cuts tend to trail what happens in the private sector by months to years.

Secondly, the analysis makes a comparison between two disparate groups - one, the employed teachers, have 100% employment in your analysis, and the second, the median household, does not. This is an extraordinarily difficult factor to incorporate, particularly when looking just at Hilliard alone, as teachers moving between districts and changing enrollment would require tracking all teachers across the state, employed or not, to track median income.

And finally, tracking a salary of an individual then comparing to a group is potentially misleading, as it ignores the fact that natural progression and attrition can keep median salaries constant or even decreasing, even with raises for individuals.

For a simple example, consider 5 employees in a company with the most senior employee leaving each year. Their salary schedule looks like:

In your first year, your median salary is $15,000. After that year, the $25,000 employee leaves, and is replaced by a $5,000 employee. Everyone else gets a $5,000 pay raise. This happens repeatedly, year after year.

In this case, the median salary is ALWAYS $15,000. However, if you track an individual, you see them getting a $5,000 raise each year.

This is a problem with your analysis -you compare individuals to means. Many private employers have increased individual salaries year over year while actually cutting average salaries or total payroll. Similarly, if you have a well-distributed teacher workforce, each year you will lose some highly paid employees at the end of their career and replace them with low paid employees. The result is that you can increase pay for individual employees (ie, step increases) without actually increasing overall costs.

That said, I agree with much of your sentiment... but it is important that we accurately analyse data.

For the purposes of economic analysis over recent periods, I've considered inflation to be zero, reflecting the yields on Treasury instruments - which have actually been negative for very short term borrowing. My point in this regard has been that as a lagging indicator, teacher comp rose while incomes in general in the economy fell.

I think it's also appropriate to recognize the unemployment in the private sector. To compare only working teachers to employed private sector workers is also a distortion, and one that is does not recognize the double whammy of rising property taxes (to pay for rising public sector comp) and no job, in the case of those unemployed. At least when income stops, so does the income tax burden. Not so with property taxes.

The example dataset you use seems oversimplified. The reality in our district is that a large fraction of our teachers were hired during the growth spurt in the 1990s, making our distribution of time-in-service very top heavy, and the salary average close to the top of the scale as well.

Our district operates at a much higher cost-per-student than Olentangy for example, not because our pay scale is higher, but because their teachers are younger. Give Olentangy a decade or two, and they'll have a distribution that looks like ours too.

Paul - from my understanding of what you said here, you've considered inflation to be zero, which leads to the problem I mentioned above - by not adjusting for inflation, you're comparing nominal income in the case of teachers to inflation-adjusted, or real, income in the case of households. Remember, the Fed reported real, not nominal, income.

So if you take that teacher salary profile and look at it in real (inflation-adjusted terms), you'll see that compensation has been dropping in recent years - the drop started after private sector median household income dropped, but that isn't unusual - it has almost always been a lagging indicator, meaning real private sector median household income would be expected to increase before real teacher salaries would, too.

FWIW, if you want to look at nominal income, the following BLS series ID will provide you with average nominal weekly income for all private sector workers:

CES0500000011

It turns out that for those working, average wages never decreased, but have continued to climb through the recession. The trend is even more pronounced when you look at college graduates only.

It's when you look at inflation adjustments (real income) that you actually see some drops:

CES0500000012

Note that the drops in real income for those employed in the private sector are actually smaller than what that mid-career teacher in Hilliard has seen over the same period.

That said, I absolutely agree unemployment in the private sector is critical to acknowledge (even did so above). I don't believe you can use it to argue that if, for example, household income (including those unemployed) drops 5% that employed teacher salaries should drop 5% (lets be fair, because if household income jumps 10%, we won't see the same bounceback in salaries for teachers)... but rather that prudence should be used, wages should be constrained, you should look for productivity and efficiency improvements, etc.

(BTW, I'm not in Olentangy :) - but rather another area of OH where rapid unconstrained residential growth has slaughtered some districts' finances. Thankfully I saw some of that coming and bought in a well-developed area with a good demographic balance, good schools, low taxes, yet arguably somewhat too generous pay for teachers)

I don't want to sound like one of those "I've made up my mind, don't confuse me with the facts" types, but we may have philosophical differences on what constitutes 'inflation.'

I view inflation as a purely monetary phenomenon, which can be caused only when the central bank increases the money supply at a rate higher than the growth of GDP (adjusted for 'velocity'). One could argue that our Fed has been trying to do exactly that, believing a little inflation would help kick start our economy, and has been frustrated that the private sector isn't taking the bait.

When prices of some products/services increase, or labor rates in some sectors go up, I don't view that as inflation. The effect of gasoline getting more expensive has been to force consumers to decide whether to keep buying the same amount of gas, and less other stuff, or to find a way to reduce their consumption of gas. Demanding higher wages hasn't been an option.

My position for a long time has been that we need to find a compensation model for teachers which: a) connects reward with effectiveness (and the reward shouldn't always be money); b) responds more quickly to general economic conditions (up and down); and, c) can be negotiated without the use of strikes, which make the kids pawns in a negotiation between adults.

So I would indeed advocate asking the teachers to take a pay cut if the economic health of our community continues to worsen. The teachers fill one of many specialized roles in our community's ecosystem. We are dependent on them to deliver one kind of service; they are equally dependent on others to bring other things of value to the party. They cannot expect to be kept whole if doing so causes others to suffer.

That being said, our teachers agreed twice to hold off on base pay increases, and in the last contract, to delay step increases - even eliminate one. Part of the motivation may have been gamesmanship relative to SB5, but the outcome is nonetheless appreciated by me.

"One could argue that our Fed has been trying to do exactly that, believing a little inflation would help kick start our economy"

I believe the real reason was to prevent deflation, not to spur inflation. If you consider the amount of money recently (electronically) printed by the Fed, we would have had massive deflation in the past 4 years without it.

(Which in truth might have been a good thing, but that's another argument but not for this blog...)

Paul - I see that we don't necessarily agree on what constitutes inflation, and I'm fine with that - no problem here. It is important to note, though, that the median household income data you refer to is adjusted for inflation as defined by the bureau of labor statistics using CPI, even if you don't agree with that definition. That means that actual, nominal, wages for those employed has actually been increasing, just not as fast as inflation as defined by CPI. Therefore, if you're going to use the data from the Fed's report, you either need to remove this adjustment, which will show wages for the general population climbing, not falling, or you need to apply the same adjustment to teacher wages.

That doesn't mean you have to agree with the scale of the adjustment, but simply to be honest in the debate - because if the nominal pay for the area is increasing, you can't manipulate the data to make it appear like wages are falling to then demand a nominal wage cut from teachers.

It seems to me like a fair adjustment would simply to tie base wage increases to the BLS index for average weekly earnings. You'd still get a lag, but it would only be 6 months at most, vs. 2-3 years we see today... but it would also guarantee no better or worse treatment than the employed population as a whole.

I'll accept your point that comparing CPI adjusted numbers to raw numbers can lead to incorrect assumptions if you accept mine that leaving the unemployed out of the analysis is similarly distorting.

The only thing that really matters is what happens at the time of renegotiation of the union contracts. I'd love it if the debate got to where you and I are - about data sources and economic philosophy, instead of the normal way of things, which intentionally disassociates the union contracts and subsequent levies.

Thanks very much for the dialog. Looking forward to future opportunities.

Would I accept that? Absolutely - that's why I brought it up before you did (my second point in my 6/28 post)... :)

I'm just not sure how to account for it appropriately in an analysis. Using median household income as a comparator brings in those who are unemployed into the group, regardless of reason. Those who are retired are brought in to the group, and that subgroup tends to bring down medians. Comparing teacher salaries to retirees living off of social security isn't exactly fair. It also brings in those with few job skills working minimum wage, which again wouldn't appropriately value teachers. Unfortunately (IMO), the economy has had increasingly disparate treatment of those with college educations and those without. Unemployment for college educated people peaked around 5% during the recession, their wages continued to grow faster than the median, etc. Do you treat teachers like an average college graduate? Do you treat them worse simply because there are people working lower skill jobs with less qualifications and pay? Tough questions. :)

Oh, and I wish the people pushing for changes in schools in my corner of the state were as reasoned as you, Paul. :)

Instead, we get people who have proven that they can't manage their own finances, yet want to run everyone else's, and come in and demand 40% paycuts across the board. That isn't even remotely helpful.

This touches on one of the arguments that almost always comes up when discussing teacher comp - that teachers deserve to be paid well because most of them have Masters degrees.

As one who has worked in the private sector, you know as well as I do that a person's education often counts when being considered for a job, but not so much once on the job. Then it's all about contribution to the objectives of the organization.

I'm not quite sure how we got to this comp system which is based simply on years of service and level of education. I guess it is a product of collective bargaining, in both the private and public sector.

I don't have a problem with unions or collective bargaining, and have said so many times. But it seems like a structure which is more appropriate for jobs where the worker has little discretion as to how the function is carried out, and therefore limited ability to distinguish one's performance from others.

But that's not what teaching is like. While there are expectations as to results, teachers have a great deal of latitude in regard to how they carry out their mission. Some are fantastically good at it. Some are duds. But the system largely ignores those differences.

That's not the fault of just the teachers, or even the teachers' unions. Truth be told, it's easier on the administrators to not have to deal with individual performance if they don't want to.

There are exceptions to every generality of course. Some administrators are great leaders, and work hard to nurture top performers and weed out the ineffective ones. It just takes a lot of work, and sadly, many don't make the effort.

Nor can the customers vote with their feet, as is the case for most industries. One's street address ties them to a school district, and it's not easy for homeowners to move, especially these days.

And of course, the ultimate beneficiary of the public education system - the kids - don't know how to be demanding consumers.

I'm a big believer in allowing an appropriately regulated free market to sort things out. We don't have enough of that in public education, and I think it's hurting our country. I hope we can work our way to a new model without blowing the whole thing up...